NOTE ON THE IMPACT OF COVID-19 ON

THE ECONOMY OF MADAGASCAR

Scenarios and recommendations

april 2020
INTRODUCTION
Madagascar is exposed to the consequences of Madagascar's total exports. In the same year,
Covid-19 in several ways, including through its imports from these countries represent 33% of
integration into the global economy, regardless Madagascar's total imports. The economic
of the endogenous implications of the impact of Covid-19 in the above countries will
containment and lockdown measures taken at undoubtedly affect Madagascar's economic
the national level. dynamics in 2020.
The countries most affected by the pandemic,
China, Italy, the United States and France, are
those with which Madagascar has the strongest Figure 3: Exports of main products year-
on-year from February 2019 to February
trade links. In 2019, exports to these four 2020 in US Dollars
countries account for 46percent of
300 000 000
Madagascar's total exports. In the same year, 250 000 000
200 000 000
imports from these countries represent 33% of 150 000 000
100 000 000
50 000 000
Figure 1: Main countries of origin of -

…
Imports
e

lt
um

el
lla

ld
ov

ba
ck

Go
ni

le
Cl

Co
Ni
Va

tro
China
Pe

19%
Feb. 2019 Feb. 2020

Rest of France
the 12% Source : Ministry of Economy and Finances
World Italia
1%

USA Year-over-year, February 2020 exports, in value

1%
terms, show an increase of 5.2percent (75.7
China France Italia USA Rest of the World
billion Ariary) compared to 2019. This
Figure 2: Main export destination
countries performance is marked by an increase in shrimp
China exports (+ 30.4 billion ariary), and Nickel
6%
(+109.5 billion ariary), despite a drop in vanilla
France
19% exports (-103.1 billion ariary).
Rest
of the Italia
1%
Similarly, the tourism sector showed signs of
World
slowing down in February. Thus, the number of
USA
20% tourists coming to Madagascar was 40,654 in

China France Italia USA Rest of the World February 2020 compared to 78,367 for the
same period in 2019, a 48.4percent decline
Source : Ministry of Economy and Finances

NOTE ON THE IMPACT OF COVID-19 ON THE ECONOMY OF MADAGASCAR I 2

from the previous year. It should be noted that
most tourists visiting the Big Island come from
France (22.5 percent), China (2.4 percent), Italy
(2.0 percent), the USA (2.1 percent) and other
countries accounting for 71percent of the total.

Figure 4: Number of tourist arrivals for the months of January and

February from 2017 to 2020
50 000,00
45 000,00
40 000,00
35 000,00
30 000,00
25 000,00
20 000,00
15 000,00
10 000,00
5 000,00
0,00
2 017 2 018 2 019 2 020

January February

Source : Ministry of Economy and Finances

Three scenarios are considered in order to deal with the uncertainties related to
the current evolution of the pandemic. Different situations are taken into account,
ranging from a limited spread that would be contained by the measures in place
(as of 31 March 2020) until April, to a pronounced spread that would extend the
measures in place until May-June, to a catastrophic situation that would require
much more drastic measures, a containment that would extend well beyond
Tananarive and Toamasina, affecting multiple new sectors.

NOTE ON THE IMPACT OF COVID-19 ON THE ECONOMY OF MADAGASCAR I 3

1. A significant impact under different scenarios
Madagascar, like most countries, introduced
measures in mid-March to restrict international
flights and then internal urban and regional
transport, particularly in the two main centres
of infection, Antananarivo and Toamasina.
These measures, in addition to disrupting world
trade, air transport, domestic trade and the
habits and behavior of economic agents, will
have a significant impact on Madagascar's
economic growth.
Figure 5: Evolution of real GDP under the
impact of Covid-19 according to scenarios
10,00%
5,00%
0,00%
2017 2018 2019
-5,00%
-10,00%
-15,00%
-20,00%
scenario 1 scenario 2
Source: Our own calculations and hypothesis
The baseline scenario (or scenario 1 in the
graphs) assumes that the number of people
affected (54 cases as of March 31) does not
accelerate in April before declining thereafter,
and that current restrictions, particularly on
domestic transport, are gradually lifted in May.
The assumptions under this scenario assume,
inter alia, that the agricultural sector will not be
affected, that from May onwards, most of the
affected sectors will restart.
NOTE ON THE IMPACT OF COVID-19 ON THE ECONOMY OF MADAGASCAR I 4
In this scenario, with moderate human impacts
and limited duration of the restrictions, the
economic impact is nevertheless very
significant with growth declining from 5.3
percent (forecast for 2020 before the crisis) to
0.17 percent.
The economic slowdown in Madagascar will be
driven by the impact of the measures on the
Services sector, which accounts for almost 54
percent of GDP. Thus, the decline in Services (-
3.3 percent), while agriculture (+3.2 percent)
and especially industry (+1.3 percent) slow
down, will be marked by the reduction in
tourism, hotels and restaurants (-14 percent)
and trade (-5.7 percent). Containment and
partial lockdown measures (school closures,
2020
transportation restrictions, cancellation of
events) are expected to have limited effects on
the Administration's performance (-1.4
percent), provided they do not persist.
scenario 3 Demand would be supported by increased
public spending, particularly on health and
social programmes, to support public
consumption to offset the fall in private
consumption. Gross investment (-2.7 percent) is
expected to fall by 8.7 points compared to pre-
crisis projections for 2020. The revival of public
investment (+7.2 percent) would help mitigate
the expected decline in private investment
(+4.6 percent).
With the sharp drop in oil prices since the
beginning of the year, the import bill will be
lighter, improving Madagascar's terms of trade,
 Figure 6: Impact of Covid-19 on monthly real
Figure 8: A shock on demand
GDP according to scenarios
50,0
10%
40,0

0% 30,0
20,0
b

ly

g
ch

ay
ril
n

ne

pt
Au
Ja

Fe

Ju
Ap

Se
M
ar

-10%

Ju
M

10,0
-20% 0,0
2019 scenario 1 scenario 2 scenario 3
-10,0
-30%
-20,0
-40% -30,0

-50% Public Cons. Private Cons. Gross Invest.

Scenario 1 Scenario 2 Scenario 3 Exports Imports

Source: Our own calculations and hypothesis

with exports nevertheless declining by 15 Inflation, estimated at 4.9 percent in 2020,

percentage points compared to initial forecasts
for 2020.
Figure 7: Evolution of real GDP and by
sector according to the scenarios
5 greater magnitude, resulting in a longer
0 containment and lockdown period, lasting until
Scenario 1 Scenario 2
-5
-10
-15
-20
-25
Real GDP, 2007 Constant Price
Agriculture
Industry
Services
Source: Our own calculations and hypothesis
Tax relief measures, lower public revenue due
to the economic slowdown and increased
social spending, should contribute to a
widening of the budget deficit (5 percent),
cushioned by the support of development
partners. Automatic stabilizers would thus
buffer the impact on economic activity.
taking into account the fall in the price per
barrel, could however accelerate if pressures is
put on basic food prices.
Under Scenario 2, the health crisis would be of
Scenario 3
June, with a recovery only starting in July.
In this scenario, the impact on growth would be
very large, with real GDP falling by 15
percentage points to -11 percent growth. The
agricultural sector would be more affected with
growth of -6 percent, as would the industrial
sector (-13.2 percent), accentuating the impact
on the service sector (-15 percent). Hotels &
Restaurants (-28.5 percent), Transport (-16.3
percent) and Household Services (-20.3
percent) are the sectors most affected by this
scenario.
Economic activity will be supported mainly by
automatic stabilizers fueled by public
expenditure, notably transfer expenditure for
public consumption of +36.5 percent.

NOTE ON THE IMPACT OF COVID-19 ON THE ECONOMY OF MADAGASCAR I 5

Gross investment is expected to decline (-18.5
percent) while the trade deficit is expected to
widen with a fall in demand for Madagascar's
exports (-15.6 percent). The budget deficit is
expected to worsen to more than 7 percent.
. Figure 9: A worsening deficit
0,0
scenario 1 scenario 2 scenario 3
-2,0
-4,0
-6,0
-8,0
-10,0
-12,0
Fiscal Balance Primary Balance
Source: Our own calculations and hypothesis
2. An informal sector in distress
With the containment and lockdown measures
putted in place, the informal sector, which
employs more than nine out of ten workers and
contributes to 24percent of GDP (ENEMPSI
2012), will be the most affected by this crisis.
Indeed, employment in the informal sector is
characterized by vulnerability, difficult working
conditions and disparities in income and social
protection.
NOTE ON THE IMPACT OF COVID-19 ON THE ECONOMY OF MADAGASCAR I 6
A third scenario (disaster) is envisaged, in which
the health crisis would last until July with more
restrictive measures. In this configuration, the
loss of GDP would be close to 19 percent (see
figure 1). The economy would be totally stall.
All sectors would be severely affected by the
crisis (see Figure 2). Only public spending could
sustain activity, with an aggravated decline in
global demand (-26.3 percent) for Madagascar,
a drop in private investment (-35.6 percent) and
private consumption (23 percent).
The government will have to let the budget
deficit (-9.7 percent) slip to allow the automatic
stabilizers to play their role more than fully.
Only 1percent of workers in Individual
Production Units (IPUs) benefit from official
social security coverage through the National
Social Security Fund (CNaPS), and only
2.9percent of workers in informal IPUs have a
written contract. Thus, most informal sector
workers are suddenly deprived of their daily
sources of income, making the lockdown an
economically unviable option in the long run
for this segment of the population.
 Strong measures to mitigate the
3. severity of the crisis and its impact
The government has enacted a partial
lockdown, where only goods can circulate, and
food markets are open until midday (12:00 PM)
during the 15 days decreed until April 4.
The private sector is supported through fiscal
measures deferring the payment of some taxes.
Thus, the private sector will benefit from a
deferral of the declaration and payment of
synthetic taxes until May 15. Similarly, the
payment of employers’ contributions to social
security and health funds, CNAPS and OSTIE, is
deferred. The State has also decided to suspend
tax audits and notices to third party holders.
Other measures are under consideration, such
as the suspension of the collection of charges
such as income tax on wages and salaries and
taxes (Value-Added Tax).
In addition, the State is negotiating with the
Bank Owners Association to extend bank
maturities and real estate loans to businesses
and individuals.
The cost of the envisaged emergency economic
measures is estimated at 115 billion Ariary (USD
30 million). The objective is to ensure that no
Malagasy employee loses his job because of
the lockdown, the Head of State explained.
NOTE ON THE IMPACT OF COVID-19 ON THE ECONOMY OF MADAGASCAR I 7
In addition, the Head of State's social
emergency plan provides for the distribution of
food donations and subsidies to support
workers directly affected by the containment
and lockdown measures, including taxi-be
drivers, taxi drivers and itinerant workers. This
plan will reach 240,000 vulnerable households
in the Fokontany (district) of Antananarivo and
Toamasina. The government will allocate 10
billion Ariary (USD 2.7 million) to implement
the social emergency plan.
Nine hundred and twenty-one (921) homeless
people living in the streets of the capital were
transferred to a shelter by the Ministry of
Population, Social Protection and the
Advancement of Women and the City Hall of
Antananarivo.
Measures are being taken to ensure strict price
control in order to avoid speculation on basic
necessities - such as rice, the country’s most
consumed product - with the establishment of
a joint brigade responsible for checking the
state of stocks and the level of prices on the
markets.
 Rapid support from development
4. partners
The World Bank has committed support of
US$20 million to the country as part of its
pledged funding mechanism for the country's
response to Covid-19. An amount of US$3.7
million is already committed through a contract
with WHO and up to US$6 million would be
disbursed under an escalation scenario and in
case of emergency (emergency component of
the nutrition project). In total, Madagascar will
receive US$13.9 million under the new APL in
response to Covid-19 (indicative country
allocation). Budgetary support and additional
measures are being prepared to help mitigate
the impact on the most affected households
and businesses. The IMF is in the process of
finalizing its support under the RCPF for
50percent of the country's quota.
Major short-term risks if the
5. situation worsens
The crisis is also an indicator of the Madagascar’s vulnerability, highlighted by different types of
risks:
The security risk with threats of popular
revolt and acts of banditry in some regions
due to the social impact of the lockdown
that deprives daily workers of income.
NOTE ON THE IMPACT OF COVID-19 ON THE ECONOMY OF MADAGASCAR I 8
UNDP has already confirmed the mobilization
of US$ 4.5 million to support the Government's
efforts to deal with the pandemic. United
Nations agencies have started to mobilize
resources to support the country, with US$
800,000 from WHO, US$ 610,000 from UNICEF
and US$ 500,000 from UNFPA. Other support is
being discussed with the State as part of the
social protection plan, which is currently being
drawn up, to help vulnerable families. An
additional US$ 2.3 million has been pledged,
including US$ 1 million from the World Bank, $
800,000 from WFP and $ 500,000 from UNICEF.
Risk of inflationary crisis linked to speculation on
the prices of essential goods and foodstuffs and
the retention of stocks despite the measures
taken by the Ministry of Commerce.
 Corruption risk linked to the political economy of the
Food insecurity risk linked to the government's ability
country dominated by powerful private interests
to rationally and optimally manage strategic stocks of
diverting public decisions in favor of their private
essential products and to secure supply chains abroad,
interests and parasitizing any optimal response to the
especially in the event of an acute global crisis.
crisis.

6. Recommendations
Some major recommendations can be put forward, which will have to be adjusted according to
the evolution of the crisis:
1. Respond to the enormous challenges of providing appropriate medical equipment at all
levels of the health crisis;
2. Develop a fiscal stimulus plan: reorganize the budget to strengthen support to severely
affected sectors and vulnerable households;
3. Expand the social protection system, including the informal sector;
4. Develop targeted fiscal measures: postponement of corporate tax payment deadlines in the
tourism, hotel and transport sectors, etc.; reduction of the tax burden on employers in return
for preserving jobs; tax incentives for companies that minimize job cuts;
5. Adjust monetary policy to avoid a liquidity crisis and strengthening the stability of the
financial and banking system;
6. Ease credit conditions for businesses and support SMEs in financial difficulty through the
provision of guaranteed bank loans;
7. Reduce taxes for additional social spending on disease control.
8. Mobilization of resources: creation of a National Solidarity fund by mobilizing resources from
public institutions and Agencies, technical and financial partners, and by appealing to the
solidarity of the favored social classes.

NOTE ON THE IMPACT OF COVID-19 ON THE ECONOMY OF MADAGASCAR I 9